VCA Tech Talk: Q&A with Steven Grin, Managing Partner at Lateral Capital

Q1: What number excites you in African technology investing?

There has been an approximate 50% compound annual growth rate (CAGR) for venture capital investment in Africa since 2015. The velocity of capital, quality of capital and new company formation are numbers that we closely monitor and are important to our industry.

Recently, Nigeria-based financial services technology company Flutterwave raised a $170 million Series-C round at a $1b valuation, making it one of Africa’s unicorns. Narrative matters and as we have seen from other markets first it is gradual – and then it suddenly accelerates. India achieved its first unicorn in 2011, and fast forward to 2021, the first quarter alone has seen 11 unicorns.

With the great digitisation that resulted from the coronavirus disease 2019 (COVID-19) pandemic, frontier markets are better connected digitally than ever before. Ideas and capital now meet much faster. Opportunity discovery, the availability of capital, company formation and competition has all advanced rapidly. The year 2021 arrived with African venture capital operating at a higher velocity.

At Lateral Capital, we are investing in African companies building tech-enabled infrastructure, tackling key verticals like healthcare, energy and financial services. Understanding that emerging markets account for approximately 80% of the global population yet account for less than 10% of all investments, we work to bridge the gap and support early-stage growth companies and entrepreneurs. In doing so, we are advancing prosperity in some of the world’s most exciting markets.

 Q2: What number worries you in the African technology space?

About 50% of the African population today, 58 million people, consume less than $2.25 per day, and $820 per year. Nigeria, Africa’s largest economy has a total of 3.7 million consumers spending above $10 per day – representing 35 million potential middle-class consumers by African standards.

The low household disposable income in Africa leaves very little window for business-to-consumer (B2C) products to thrive across a continent where food is by far the biggest household spend category, e.g. 57% in Nigeria. In fact, everything you sell to consumers is competing with food.

The key point being that the African consumer base, while growing quickly, remains highly fragmented and is not homogenous. The path to scale for African ventures cannot rest on the elusive African consumer that is often alluded to. To complicate matters, nearly 300 million Africans are employed in the informal sector, with 70 to 100 million expected to face job loss income reduction as a result of COVID-19.

Q3: What are your 10-year technology return’s expectations for Africa?

In an exponential world, risk does not equal reward, your upside is limitless. That is what is unique about investing in the future. The target for a typical top-quartile venture capital fund is delivering a net 3x return or 25% internal rate of return (IRR) to their LPs. We believe that given the asymmetries of Africa that we can do far better.

At Lateral Capital, we are believers in Africa’s innovative future but are not afraid to invest in the hard infrastructure that will undergird it. We believe that success depends on addressing the largest structural challenges that limit successful private investment in African markets. Therefore, funds cannot be only about pure play software – effective investment strategies have to focus on hardware and software companies strengthening the underlying pillars of economic development.

Q4: If you were an entrepreneur, what kind of company would you launch today, with an expectation for it to become a Unicorn over the next 10 years?

Decentralised finance is everything and is going to disrupt finance and capital markets as we know it.

Banking is critical for economic development, poverty reduction and sustainable growth. Yet the traditional banking system in Africa has failed to bridge the gap as banking penetration across the continent remains under 40%. While mobile money and open banking platforms have made up for some of the inadequacies, solving for payments and transfers is not enough to create financial prosperity.

But change is coming, thanks to the development of the decentralised finance ecosystem. Some particular areas that we are excited about include programmable money that can incentivize behaviors, using the blockchain for interoperable economic identity and the tokenisation of assets to unlock wealth from land, mineral rights and future earnings from contracted revenue.

Truly, banking the unbanked through systems that are permissionless, decentralised, algorithmically programmable, free from censorship restrictions and the incompetence’s of central banks. And as investors, we believe this will create some of the most impressive returns in modern history.

Q5: Why should LPs today back a VC fund as opposed to a PE fund?

Outsized returns come from early bets. In an exponential world, reward massively outsizes risk.

PE firms typically invest tens of millions of dollars to take majority or semi-majority control positions and use leverage to improve a company’s performance and expect to sell their stakes within five years for a higher multiple. This levered arbitrage model works quite well in more developed markets but has significantly underperformed in Africa.

We believe that the largest opportunities in Africa lie in high-growth but small companies that are leveraging technology, talent and capital. For these companies, spreadsheets only tell part of the story. But to discover their worth and unlock true value, investors can’t transplant strategies designed for developed markets to an emerging market context.

Instead, new models and ways of thinking are required. The same innovative thinking that brought Kenya to the forefront of the global mobile money industry should be applied to traditional finance, unlocking capital for the opportunities in Africa.

ABOUT THE INVESTOR

Lateral Capital is an early-stage investment firm set up in 2016 to back technology deals, across Sub-Saharan Africa (SSA). The investor is currently on the fundraising trail with its latest SSA-focused early-stage vehicle.

Lateral Capital recently closed a deal to back an investment in Mono, a Nigeria-based financial services technology company.

ABOUT VCA TECH TALK

Venture Capital Africa (VCA) Tech Talk is a Thought Leaders segment that draws views from leading investors in Africa’s technology space.